AOL makes big bet on original content

Jameson Berkow, Financial Post02.07.2011

Tim Armstrong, chief executive officer of AOL Inc., left, and Arianna Huffington, co-founder of the Huffington Post, stand for a photograph at AOL's headquarters in New York, U.S., on Monday, Feb. 7, 2011. AOL Inc. agreed to buy the Huffington Post for US$315-million as the internet company spun off from Time Warner Inc. increases its investments in online content to help revive growth in advertising revenue.

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Now a small shadow of the Internet industry Goliath it once was, AOL desperately needs new revenue streams to replace old ones that will never be coming back. The company’s core dial-up Internet subscription service has plummeted from a 2002 peak of 31-million subscribers bringing in more than US$9-billion in annual revenues to a September 2010 level of just 4.1-million dial-up customers, accounting for little more than US$3-billion in annual revenue by the end of 2009.

Following a disastrous merger with legacy media conglomerate Time Warner Inc., the company brought in Tim Armstrong, a former advertising executive at Google Inc., to reinvent AOL as a media company. As those 4.1-million dial-up customers aged without being replaced by younger subscribers, who tend to prefer faster broadband Internet service, the hope was that new advertising revenue generated from original content would help to fill the increasingly gaping hole left by dwindling dial-up fees.

“Tim Armstrong wanted [AOL] to become the studio, effectively, for premium Web content,” said Adrian Drury, London-based media and broadcast technology analyst with industry analysis firm Ovum Plc. “So the question is whether [Armstrong] has backed himself into a corner or if there will continue to be value in owning key Tier-1 properties in various content segments.”

Mr. Armstrong was quick to bet AOL’s future on the later, employing the “content is king” mantra oft-repeated among Internet startups.

AOL had already owned Weblogs Inc., parent company of noted technology blog Engadget as well as dozens of other online news sites, since 2005. But under his leadership the company rapidly bought up several niche online news sources such as mixed martial arts blog MMAFighting.com in 2009 and technology news site TechCrunch in 2010, while simultaneously developing its own unique Web properties, such as hyperlocal news service Patch.com.

The media transformation entered its final phase Sunday, when AOL agreed to pay US$315-million to purchase The Huffington Post, easily among the most recognizable names in online news. It was a smart buy in keeping with the “content is king” strategy, analysts say, as the left-leaning news, opinion and lifestyle website draws in about 25-million unique visitors per month; making it second only to The New York Times among U.S. online news readers. It is also the last big buy the beleaguered Web giant is expected to make for some time, having cost about 40% of every penny AOL has on hand.

“There is an interesting role for The Huffington Post here as a hub for a lot of these fairly disparate [AOL content] properties at the moment,” Mr. Drury said. “What [AOL] wants to do here is become the digital equivalent of a newspaper with a bunch of specialized sections in it.”

As part of the deal, Arianna Huffington, the website’s iconic and liberally opinionated co-founder, is poised to become editor-in-chief of newly created The Huffington Post Media Group. As the leader of what will essentially be an amalgamation of several hundred distinct AOL-owned media properties, Ms. Huffington’s current public image as a left-leaning author and political pundit is about to change forever.

“[Arianna Huffington] is no longer a little upstart, she is now a media mogul,” said Ken Doctor, media analyst and author of Newsonomics: Twelve Laws That Will Shape the News We Get. “When she is [at the World Economic Forum meeting in] Davos [Switzerland], she can rub elbows with [News Corp. chief executive Rupert Murdoch] and in a lot of ways she gets a much bigger sandbox to play in.”

Putting Mrs. Huffington in charge of all AOL content will make it difficult for the company to maintain a politically neutral image of itself. Yet Mr. Doctor suggests that could be precisely the point.

“Being a general news company isn’t what built The Huffington Post,” he said. “What built it was passionate partisanship.”

“So maybe [passionate partisanship] is the position AOL is taking in the market, that it can be the [free] left alternative to the [paid] right alternative of News Corp. with [The Daily],” Mr. Doctor said, referring to the Apple iPad-only digital newspaper launched last week by News Corp., publisher of several print newspapers including the Wall Street Journal.

“Maybe this is a new era of media moguls where partisanship is okay because it wins a big audience,” Mr. Doctor said.

Unlike The Daily, which charges readers a weekly or monthly subscription fee, all AOL-owned content is accessible to anyone free of charge. While that strategy allows AOL to reach a much larger audience, it also forces the company to rely entirely on digital advertising revenue for bottom-line growth.

The company’s lack of presence in the rapidly expanding mobile space makes it an especially risky bet to make.

“[AOL] is behind in tablet applications, in smartphone applications and much of the digital ad spend is moving quickly toward mobile,” said Mr. Doctor. “They have the right philosophy I think, but they have real execution questions.”

So the question on the minds of many AOL shareholder is likely ‘will being crowned king of original Web content eventually make up for the US$6-billion and growing shortfall in dial-up revenues?’

“At the end of the day having a bunch of strong content assets there is probably not going to do it,” said Mr. Drury. “[AOL] is going to need a really smart social and mobile strategy that will enable it to achieve scale on mobile platforms plus participate in mobile advertising revenues.”

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